In the last couple of years savers have been given a wake-up call: that even though their money is in the bank, it doesn’t necessarily mean it’s safe. I’m not talking about your money being stolen in a bank robbery, but something far less obvious – banks failing.
The scare surfaced after Lehman Brothers – a global financial services firm, declared itself bankrupt in 2008 marking the largest bankruptcy in U.S. History.
Concerns were again raised after Icesave – an online savings brand owned and operated by Landsbanki – collapsed, affecting hundreds of thousands of customers and businesses. In the UK, Icesave’s marketing slogan was “clear difference”, offering its customers three types of savings accounts: an instant access savings account, a cash ISA, and a range of fixed rate bonds, paying interest rates of more than 6%. This was enough to attract over 300,000 accounts in the UK alone.The realisation that savers’ funds were at risk brought panic among many, which caused the Finanial Services Authority (FSA) to re-assess the amount of money the Financial Services Compensation (FSCS) would guarantee to those with UK bank accounts, increasing the limit to £50,000 of cover per person per financial institution operating in the UK.
However, trying to determine which banks belong to which institution has proven to be a difficult task, especially after a series of mergers and takeovers between financial institutions – particularly building societies, which took place as a result of the stress of the credit crunch.
According to the government, the current scheme covers 98% of accounts, and previous actions during the banking crisis suggested it would probably guarantee all savings, after Chancellor Alistair Darling assured all individuals holding funds with the failed Icelandic bank that they would be compensated in full, regardless of any limits.
Some savers with substantial funds have previously spread their money between different institutions to ensure its safety, with a few banks offering 100% protection, while paying low interest rates in exchange for this guarantee.
For example, if you have a Barclays bank account containing £50,000 and an HSBC bank account with another £50,000, all of this would be protected as the rules stipulate cover for deposits per customer and per institution.
However, if you have £50,000 in an HSBC account and £50,000 in a First Direct account, only £50,000 of your savings are covered.
Northern Rock, which effectively collapsed in the autumn of 2007, offered a 100% guarantee on all accounts in order to attract new custom and restore confidence in the bank, but this cover is set to end on 24 May 2010, following the split of the nationalised bank.
But the mergers between banks and building societies have in some cases left it unclear as to how the compensation scheme lies, with some offering extended limits, while others obtain a single membership therefore offering a single limit among all providers that fall under the institutions umbrella.
As a result, savers can end up with two accounts which they understand to be provided by separate banks, but which actually now fall under the same authorisation of the Financial Services Authority (FSA) and therefore only cover up to £50,000 between them.
For this reason it is important to be aware of which banks are joined to others, and which count as individual. Which4U.co.uk has summarised this using two tables which allow you to quickly identify which banks are counted as separate in terms of compensation. See Independent and Grouped Banks.
David Black, banking analyst at Defaqto, said that savers could benefit by having a “spring-clean” and checking all accounts to ensure 100% are safe.
“You should keep just below £50,000 because of interest, and it’s also worth checking for peace of mind and to make sure you are getting a good deal,” he said.